Can I take a DST interest out of my IRA in kind?

The tax is the value on the day the interest leaves, whether or not you ever see cash

Section 408(d)(1) includes in gross income any amount paid or distributed out of an IRA. The instructions for Form 1099-R tell the trustee to include in box 1 the fair market value of securities or other property on the date of distribution, and to enter code K in box 7 for a distribution from a traditional IRA of assets that do not have a readily available fair market value. The number comes from the custodian; how a DST interest is valued inside an IRA explains where it gets it.

Publication 590-B applies the 10% additional tax to any assets, money or other property, distributed from a traditional IRA before 59 and a half, subject to its listed exceptions. For a Roth IRA the publication's ordering rules decide how much of the value is taxable, and it states that the basis of property distributed from a Roth is its fair market value on the date of distribution.

For a traditional IRA the practical result is the same: the value you report becomes your starting basis in the interest you now hold personally. That basis, net of the land share, starts a new depreciation schedule, which investing in a DST without a 1031 covers for cash buyers generally.

Three parties have to act: the custodian, the sponsor and you

The custodian distributes the asset by instructing the sponsor to transfer the beneficial interest from the account's name to yours. Not every custodian processes in-kind distributions of private placements; ask before you rely on it. The facts in Rev. Rul. 2004-86 describe interests that are freely transferable but not publicly traded, and a filed trust agreement may require the trustee's consent to any transfer and set a minimum interest size, so a partial in-kind distribution may not be available.

You sign the sponsor's transfer paperwork as the incoming owner. Once the register shows your name, distributions go to your bank account and the annual grantor statement comes to you, as the grantor letter describes.

What you cannot do is deal with the account on the way out. Section 4975(c)(1)(A) prohibits any sale or exchange of property between the account and a disqualified person, which includes you, so buying the interest from your own IRA for cash is not an alternative to a distribution; it is a prohibited transaction, and section 408(e)(2) strips the account of IRA status.

Why an owner does this, and what the retirement wrapper gives up

The usual reason is a required minimum distribution the account cannot fund in cash because its only asset is the trust interest; buying a DST inside a self-directed IRA or solo 401(k) explains that problem. Publication 590-B does not say whether an in-kind distribution counts toward the year's amount, so confirm with the custodian that it will treat the valued interest as satisfying it.

The second reason is to escape unrelated business income tax on a financed trust. A personal holder owes no tax under section 514; the trust's income lands on Schedule E, depreciation is yours to use, and the passive-activity rules in DST passive losses and sale take over. The third is estate planning: outside the account the interest is real property that takes a basis step-up at death, inside it every dollar is ordinary income to your heirs.

The cost is the wrapper itself. The distribution tax is due in one year on an asset you cannot sell to pay it, and the interest stays illiquid, with distributions that can be reduced or suspended and a property that can sell for less than the account paid.

The 60-day door swings one way: the same property can go back, cash cannot

Publication 590-A lets you roll a distribution into another IRA within 60 days, but only if the property you contribute is the same property that was distributed. You can therefore move the interest to a new custodian by taking it in kind and rolling it over, once in any 12-month period under section 408(d)(3)(B).

You cannot sell the interest and roll over the proceeds, and after 60 days it cannot go back: section 408(a)(1) accepts contributions only in cash, and a later sale of the interest to your own account is the prohibited transaction above. If the aim is to keep the interest in a retirement account but stop required distributions, converting a DST in a traditional IRA to a Roth is the in-kind route that keeps the wrapper.

Worked example: a $150,000 interest taken out at 62

Hypothetical, rounded figures. Your traditional IRA holds one DST interest the custodian values at $150,000. At 62 you ask for it in kind. The custodian issues a Form 1099-R showing $150,000 in box 1 with code K; at an assumed 22% federal marginal rate the tax is about $33,000, paid from savings outside the account. No 10% additional tax applies because you are past 59 and a half.

From the following January the trust pays you directly, you report your share of its rent, interest and depreciation on Schedule E from the grantor letter, and your $150,000 basis, less the land share, depreciates from that date. When the trust sells, you may exchange your share of the proceeds under section 1031 on the strength of Rev. Rul. 2004-86. Compare that path with leaving the interest in place until the trust sells, with your CPA.